Steps to take when designing your long term care plan

Developing a cost assessment will give you insight into what it might look like to have to pay for care.

Fact Checked by

Matthew Schwartz, CFP®, CRPC®

Steps to take when designing your long term care plan

In our last article we looked at the realities of long term care for the average American and the need to talk about and determine a plan for your care needs. Once you have created your desired care plan, the next step is to assess the cost of care on your financial situation. Developing this cost assessment will give you insight into what it might look like to have to pay for care as you approach the age in which care is more likely to be needed. This means it’s time to crunch the numbers!

So how do we start?

We start planning for the cost of long term care by having a holistic plan for your financial situation. But what does that look like?  The holistic plan will include spending for common retirement lifestyle activities like travel and gifts to grandchildren along with covering your bills. However, there are moving pieces within a holistic plan we need to make sure we consider. Things like inflation, taxes, and varying levels of potential investment return are factors that must be taken into account.  Once your plan is built, you can incorporate the costs of your desired care plan and determine if any action needs to be taken.

The cost of long term care (LTC) can negatively impact asset values, leaving less for survivors or beneficiaries. For some, their nest egg covers the cost of potential care, in both average and catastrophic long term scenarios.  But for most, this is not realistic. The burden of several years of LTC expenses could exhaust the nest egg to zero.

Is there any help from the government?

For those who would be at risk of spending their entire nest egg, Medicaid will step in and cover the expenses in most facilities. Medicaid is the government program that will pay for health care expenses for the poor.  It is important to note the difference between Medicaid and Medicare.  Medicare, health insurance for those over 65, does not cover LTC costs.  In order to qualify for Medicaid, all of your assets need to be spent first.  For many, the thought of being dependent on the government after decades of discipline in savings and a successful retirement is not ideal.  For others, relying on Medicaid can be just fine. It comes down to what option you prefer and how it might work in your overall financial plan.

Purchasing LTC could purchase you freedom to live now…

Retirement is about being able to accomplish your goals and dreams and if the risk of LTC costs holds you back from having the lifestyle you desire, action should be taken.  This will come in the form of purchasing Long Term Care insurance. By allocating a minority of your retirement nest egg towards the certainty of a benefit for LTC expenses, you can be more free to spend your remaining nest egg on what is most important to you.

LTC insurance will provide a buffer for your assets and allow you to leave more for survivors or beneficiaries.  However, it is important to weigh the cost vs. the benefits. If the cost of the LTC insurance limits your ability to live comfortably in your retirement, it probably is not a great solution for you.  If there is the flexibility to afford a policy, it can be a great tool. For the premium amount you pay, you receive guaranteed growth on the premium in the form of LTC benefits.  In addition, these benefits are almost always designed to be tax free.  These benefits are also not subject to sequence of returns risk.  For example, without LTC insurance,  if your nest egg, invested in stocks, happens to lose value right as the high costs of LTC are incurred, you can be forced to lock in significant losses to pay for your care.

What are my options for LTC insurance?

There are 3 main types of LTC insurance.  The first and oldest type we call Traditional LTC.  This will offer a pool of assets that you can draw from on a daily or monthly basis when you start to need care.  If you never need LTC, there are no residual benefits.  These policies are also typically “tax qualified”, meaning they qualify as “partnership” policies under HIPAA.  This aspect of the law incentivises the purchase of LTC insurance by providing asset protection equal to the value of the LTC benefits in your insurance policy.  For example, if your LTC insurance policy has a total benefit of $500,000, once you spend down your assets to $500,000, you will become Medicaid eligible and your care will be paid for.  Historically, the experience with these policies has not been great.  Insurance companies mispriced these policies from the start, so many face increased premiums when they were told that the premium would never change.  For newer policies, this is less common since the insurance companies have improved their understanding on how people use their LTC policy.

The next option is asset based or hybrid policies.  These policies are life insurance (either whole life or universal life) policies that allow for an acceleration of your death benefit in the event you need to spend it on LTC. Furthermore, these policies offer riders that will extend the LTC benefits beyond the value of your death benefit.  If you never need LTC, the death benefit will pay out to your beneficiaries a tax free lump sum.  The premium payments can be flexible, all the way from one lump sum to a lifetime premium.

Lastly, there are annuities that offer enhanced income if LTC costs are incurred.  Some annuities that are designed for lifetime income will offer an enhanced income for a period of time if LTC is needed.  It is important to know how your policy works.  For most of these policies, this benefit is only realized if the policy still has cash value.  If you have already exhausted the cash value, yet are receiving the lifetime benefit, your income will not increase in the event of LTC needs.

Other annuities are designed specifically for LTC.  They offer enhanced benefits, specifically for long term care.  Once you submit a claim, you begin spending your annuity cash value until it is exhausted.  From there, the insurance company will continue to pay for the agreed upon length of time in your contract.  These annuities are designed to maximize benefits if LTC is needed.  If it is not, you will receive a small amount of growth each year that will be similar to that of a bank CD.  If you pass away without needing LTC, your cash value will go to your beneficiaries.

First things first…

The starting point is building a holistic plan.  Understand how each aspect of your financial situation impacts other areas.  Once the plan is built, develop a plan for LTC. Start with your desired care plan and communicate this plan to loved ones.  Take the obligation of creating expectations away from them.  From there, consider how LTC costs impact your projected financial situation. Ultimately, you will gain peace of mind about one of retirement’s biggest risks. Living in fear of Long Term Care is not the retirement that you deserve. Build a plan so that you can live greatly.

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